June 10 (Bloomberg) -- The Bank of Korea raised interest
rates for a third time this year to rein in inflation that has
exceeded its target range and curb record household debt.

Governor Kim Choong Soo boosted the benchmark seven-day
repurchase rate to 3.25 percent from 3 percent, following
quarter-percent increases in January and March, the central bank
said in a statement in Seoul today. Kim said the decision was
unanimous. Eight of 17 economists surveyed by Bloomberg News
predicted the decision with the rest expecting no change.

South Korea joined Thailand in raising borrowing costs this
month as job growth and costlier energy caused consumer-price
gains to exceed the Bank of Korea’s 4 percent ceiling every
month this year. The yield on five-year government bonds rose 12
basis points to 3.95 percent, the highest since May 20, as Kim
said he must stop inflation from becoming a “chronic problem.”

“It was a sensible move by the BOK, in recognition that
the balance of risks are still clearly tilted towards
inflation,” said Wai Ho Leong, a senior regional economist at
Barclays Capital in Singapore. “The bank remains on a
consistent normalization path” and will raise rates again in
September, he said.

The won rose 0.03 percent to 1,082.65 per dollar as of the
3 p.m. close in Seoul, extending the currency’s advance this
year to 4 percent. The Kospi stock index fell 1.2 percent,
erasing earlier gains of as much as 1.1 percent.

Bank Indonesia left its reference rate at 6.75 percent
yesterday as a strengthening currency helped contain inflation.
Thailand raised rates for a fourth time this year while the
Philippine central bank increased the rate it pays lenders for
overnight deposits to 4.5 percent in May.

‘Anchoring’ Prices

The Korean central bank signaled that it will continue to
raise rates because of persistent price pressures, a departure
from some central banks in Asia that have paused on tightening
as oil prices retreat from their April peak and higher borrowing
costs cool growth.

“The committee will conduct monetary policy with a greater
emphasis on ensuring that the basis for price stability is
firmly anchored while the economy continues its sound growth,”
the BOK said in a statement. “Despite the temporary
sluggishness of domestic demand, the economy has maintained its
underlying upward trend.”

Higher rates may fuel gains in the won, eroding export
sales that are a key driver of the economy. Overseas shipments
climbed 23.5 percent in May from a year earlier, less than
economists expected, after reaching a record in April.

‘War’ on Inflation

President Lee Myung Bak declared “war” on inflation in
January, and the government imposed price controls and tolerated
currency appreciation as part of the campaign, as the rising
cost of living contributed to growing public discontent. His
approval rating fell to 28.4 percent in a May 30-June 3 poll
compared with 76 percent when he came to power in February 2008,
according to Seoul-based Realmeter.

Consumer prices rose 4.1 percent in May from a year earlier,
the fifth-straight month it exceeded the central bank’s target
of 2 percent to 4 percent through 2012. Core inflation excluding
volatile food and energy items accelerated to a two-year high of
3.5 percent in May. Producer prices increased 6.2 percent in May,
the slowest pace in four months, a report today showed.

The central bank has raised interest rate from a record-low
2 percent since early July as it expects consumer prices to rise
3.9 percent this year, near its 4 percent inflation target limit,
while the economy will grow 4.5 percent.

Record Debt

Complicating efforts to fight inflation, household debt
rose to a record 801.4 trillion won ($740 billion) in the first
three months of this year, the Bank of Korea said on May 25. A
separate report showed yesterday that the nation’s bank lending
to households rose the most in six months to another record
439.8 trillion won in May. Consumer borrowing has helped fuel
housing demand and consumption, supporting growth.

Interest rates are still “significantly below the growth
rate,” an incentive for indebted households to borrow more,
according to Erik Lueth, a Hong-Kong based economist at Royal
Bank of Scotland Group Plc. With core inflation continuing to
rise “monetary conditions are still accommodative,” he said.

Financial liabilities of individuals in South Korea were
155.4 percent of disposable income at the end of 2010, “one of
the highest ratios globally” and is still climbing, Young Il
Choi, an analyst at Moody’s Investors Service, said in a report
last month. The Financial Services Commission said this week
authorities need to pay special attention to household debt,
“which may weigh considerably on the financial market.”

Not Beyond Control

“The household debt is far from small but it’s not beyond
our control,” Governor Kim said at a press conference today.
“We need to address it first with microeconomic policy tools
and also consider the appropriate level of liquidity for the
nation on the macroeconomic and monetary policy front.”

The Finance Ministry said in its monthly economic
assessment report yesterday that external conditions are
“highly uncertain” due to high oil prices, a possible slowdown
in major economies and renewed concerns over the European fiscal
crisis.

LG Electronics Inc., the world’s third-largest mobile-phone
maker, said last week that a recovery at its handset business
may take longer than some analysts expected. LG’s mobile-phone
division had an operating loss of 100.5 billion won ($93
million) in the first three months of the year, contributing to
a second straight quarterly loss for the company.

South Korea’s economy grew 4.2 percent in the first quarter
from a year earlier, unchanged from an earlier estimate, the
central bank said this week. The economy expanded 1.3 percent in
the three months through March from the previous quarter, less
than the April estimate of a 1.4 percent gain, mainly due to
weak private consumption and facility investment.